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Department of Banking and Insurance Offers Financial and Health Insurance Tips to College Students and Their Parents

TRENTON, NJ – With college classes set to resume later this month, New Jersey Department of Banking and Insurance Acting Commissioner Ken Kobylowski today offered tips and suggestions to new and returning students and their parents on how to make smart financial decisions and insurance choices, avoid paying unnecessary costs and not fall victim to scams aimed at college students.

“Today’s college students and their parents are facing significant costs to meet their tuition payments and college living expenses,” said Kobylowski. “So it is important that they make educated consumer choices, avoid scams and manage their money as wisely as possible in other, college-related financial decisions.”

College-Issued Debit Cards

Universities may contract with financial institutions to disburse financial aid to students to save on administrative costs. Those financial institutions issue debit cards under the university name to students to access the funds. The cards can also be used to purchase food and other supplies on campus, and serve as identification cards for security and access to campus events.

However, problems may arise if students use these cards as debit or credit cards without first reading the fee schedule. Student account holders can be charged fees as high as $20 to $30 the first time they overdraw their account and might pay higher fees for each additional overdraft; and $2 or more to use another bank’s A.T.M. to withdraw cash.

Students should shop around off campus for a financial institution offering a debit card that offers the lowest interest rates and fees. Students may want to opt out of payment cards that their school issues to disburse college loan funds and select direct deposit or paper checks instead. These options may prove to be less expensive.

Credit Cards

Some universities sell student lists to credit card companies which then aggressively market cards to students using low introductory interest rates and other promotions. Under the provisions of the federal Credit Card Accountability Responsibility Disclosure (CARD) Act of 2009, banks are forbidden from offering free items such as mugs or t-shirts to students as incentives to sign up for credit cards on campus or at an event sponsored by or related to a university or college. The Credit CARD Act also forbids credit card issuers from offering credit cards to students younger than 21 without a co-signer or some proof they have the financial resources to repay their credit card debt. However, the Credit CARD Act requires only proof that a student under age 21 have the resources to make the minimum monthly card payment – typically a small fraction of the total amount owed.

Before signing up for a credit card, students should read the contract carefully and review all fees. Many credit card companies impose steep fees for missed or late payments, exceeding credit limits, or writing a check drawn on the account. Some companies charge fees whether the card is used or not. Also, once the introductory rate expires, the interest rate can increase dramatically.

A debit card, cash or checks may be a better way for students to pay expenses. Students who decide to obtain a credit card should maintain a small credit limit, pay off the balance each month and should not sign up for more than one or two cards. They should also avoid cash advances, which can generate high fees and carry a much higher interest rate than the rate applied to purchases.

When shopping for a card, students should consider the following:

Shop for a credit card with a low Annual Percentage Rate (APR). The higher the APR, the more it will cost to borrow if the monthly balance is not paid. Students should exercise caution with those cards with low introductory APR offers.

Look for a card with a low or no annual fee. This is the fee that must be paid whether or not the card is used.

Understand the credit card’s default interest rate. This is the penalty rate that may be applied following a late payment or for paying less than the minimum. A penalty rate may apply to all future purchases and to any remaining balance.

Student Loans

Although deadlines for choosing a loan for the school year generally fall in June, these are some guidelines for the future selection of student loans.

If possible, choose a federal loan, such as Stafford, Plus or Perkins, rather than a private loan. Interest rates on federal loans tend to be lower and fixed, rather than variable, with shorter payment terms and more flexibility for making payments. Unlike many private loans, federal loans may offer payback deferrals, income-based repayment and public service loan forgiveness.

Consider a New Jersey College Loan to Assist State Students (NJCLASS) offered through the Higher Education Student Assistance Authority (HESAA). New Jersey residents attending any college may apply for these loans.

Understand the terms of the loan agreement. This requires reading the loan agreement very carefully and asking questions. If a loan is deferred or the repayment terms extended, this could change the interest rate and make the loan more expensive. It could also affect the borrower’s credit score.

Life Insurance

Parents who are co-signing for their child’s college loan should consider purchasing life insurance to cover the guaranteed debt.

Most federal and many private college loans – but not all – include debt forgiveness clauses in the event of death; however students and parents who co-sign for the loans without such clauses should make sure that they have some form of protection in the unfortunate event of the student’s death.

If parents who co-sign are unable to find college loans that include debt forgiveness, they should consider purchasing insurance policies for their child that would help defray the costs of the loans in the event of the child’s death. This could either be a term or a whole life policy. Once the student graduates, he or she should assume responsibility for the policy.

According to the National Center for Education Statistics (NCES), during the last decade undergraduate tuition, room, and board at public institutions rose 32 percent, and at private institutions the cost rose 24 percent, after adjusting for inflation. Meanwhile the federal government’s maximum borrowing level in recent years has not mirrored the increasing costs and the long term outlook has the borrowing level remaining constant. This has created a growing gap between the cost covered by federal loans and the actual cost of attending college.

Nearly 50 percent of full-time students took out federally financed student loans in 2007-08, the latest numbers available from the NCES. According to the U.S. Department of Education, federally financed student loans can be canceled or reduced in the event of a student’s death. Some of the larger commercial lenders, such as Wells Fargo and Sallie Mae, also have similar policies regarding debt forgiveness. However, not all do, and consumers should consider life insurance to cover these instances.

Healthcare Insurance

New Jersey law requires college students to have health insurance coverage, and many colleges automatically enroll students in health insurance plans offered by a health insurance carrier through the university. Students who are auto-enrolled can opt out of the college-issued plan by showing they have other coverage.

Most students can remain covered by their parents’ group health insurance policy until they reach age 26. If the health insurance policy is issued in New Jersey, State law allows young adults to remain covered by their parents’ group policy until age 31.

Pursuant to federal laws, coverage of dependent children may no longer be limited based on whether the child is financially dependent on the parent, residing in the parent’s household, or a full-time student. The young adult may remain covered through his or her parents’ plan even if he or she marries.

Students purchasing their own health insurance or the health insurance policy offered through their school should shop around to find the best price, understand the cost of all deductibles and co-pays, make sure the hospital, doctor or other health care provider they wish to use is part of the provider network and check the Department’s website for information on providers and costs at: http://www.state.nj.us/dobi/division_insurance/ihcseh/index.html

“Whether choosing a bank, managing their credit, shopping for a health insurance plan, or deciding on which college loan to apply for, college students should understand that they have to do their research in order to secure the most generous terms at the best price,” said Acting Commissioner Kobylowski.

“Parents who are reviewing health insurance, loan shopping or considering the purchase of a life insurance policy to cover their children, need to research and understand their options thoroughly. Both parents and children should invest similar time and energy expended in shopping for college when making college related financial services decisions.”

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